Welcome to the Community Bank System First Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. Mode. Please note that this presentation contains forward looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the industry, markets and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause results to differ materially from the results discussed in these statements.
These risks are detailed in the company's annual report and Form 10 ks filed with the Securities and Exchange Commission. Today's call presenters are Mark Trinniskey, President and Chief Executive Officer and Joseph Suterres, Executive Vice President and Chief Financial Officer. They will be joined by Joseph Serban, Executive Vice President and Chief Banking Officer, for the question and answer session. Gentlemen, you may begin.
Thank you, Gary. Good morning, everyone, and thank you all for joining our Q1 conference call. The quarter was generally pretty good and maybe even modestly better than we expected on a recurring basis. GAAP earnings were obviously very strong, but positively impacted by a $0.10 per share reserve release and an $0.08 per share benefit from PPP fees, so about $0.79 for the quarter on a recurring basis. The margin came in a bit better than we forecasted and our non banking businesses continue to accelerate growth on both the revenue and margin lines.
Our benefits business was up 12% in EBITDA over the last year. The wealth management business was up 35% and the insurance business was up 28%. We also had an ever so slight bit of organic loan growth in the quarter ex PPP, which is atypical for us in any Q1 and loan quality is in as good a shape as I've ever seen it. Our consumer lending businesses are very strong right now and we expect a solid second and third quarter performance there. On the challenges front, the margin may continue to contract and we need to rebuild our commercial pipeline, which is recovering slowly from the impact of the pandemic.
In general, I think we had a very good start to the year. Joe?
Thank you, Mark, and good morning, everyone. As Mark noted, the Q1 earnings results were solid with fully diluted GAAP and operating earnings per share of $0.97 The GAAP earnings results were $0.21 per share or 27.6 percent higher than the first quarter 2020 GAAP earnings results and $0.20 per share or 26% better on an operating basis. The increase was attributable to a significant decrease in the provision for credit losses, higher revenues and lower operating expenses, offset in part by increases in income taxes and fully diluted shares outstanding. Comparatively, the company reported GAAP earnings per share of $0.86 and operating earnings per share of $0.85 in the linked Q4 of 2020. The company recorded total revenues of $152,500,000 in the Q1 of 2021, a $3,800,000 or 2.6 percent increase over the prior year's Q1 revenues of $148,700,000 The increase in total revenues between the periods was driven by an increase in net interest income and higher non interest revenues in the company's financial services businesses, offset in part by lower banking non interest revenues.
Total revenues were also up 1 point 2 percent from the linked 4th quarter, driven by increases in net interest income, banking non interest revenues and financial services business revenues. Although several factors contributed to the net improvement in net interest income, the results were aided by the recognition of net deferred PPP loan origination fees of $5,900,000 in the quarter due largely to the forgiveness of $251,300,000 of Paycheck Protection Program loans. The company's tax equivalent net interest margin was 3.03 percent in the Q1 of 2021 as compared to 3.65% in the Q1 of 2020 and 3.05% in the linked Q4 of 2020. Net interest margin results continued to be negatively impacted by the significant increase in low yield cash equivalents between the comparable annual quarters. Average cash equivalents increased $1,550,000,000 between the Q1 of 2020 and Q1 of 2021 due to the net inflows of stimulus funds and PPP between the periods.
The tax equivalent yield on earning assets was 3.15 percent in the Q1 2021 as compared to 3.93 percent in the Q1 of 2020, a 78 basis point decrease between the comparable periods. The company's total cost of deposits remained low, averaging 11 basis points during the Q1 of 2021. Non interest revenues were down $100,000 or 0.2 percent between the Q1 of 2021 and the Q1 of 2020. The decrease in non interest revenues was driven by a $2,400,000 or 13.4 percent decrease in banking related non interest revenues, which was largely offset by a $2,300,000 or 5.7 percent increase in financial services business non interest revenues. The decrease in banking related non interest revenues was driven by a $2,200,000 decrease in deposit service fees, including customer overdraft occurrences, a $200,000 decrease in mortgage banking income.
Employee benefit services revenues were up $1,200,000 or 4.6 percent over the Q1 2020 results, driven by increases in employee benefit trust and custodial fees. Wealth management revenues were also up $1,100,000 or 14.9 percent over the same periods due to higher investment management advisory trust services revenues. Insurance services revenues also increased slightly over Q1 2020 results. The company recorded a $5,700,000 net benefit in the provision for credit losses during the Q1 of 2021 due to a significant improvement in the economic outlook and very low levels of net charge offs. Conversely, the company reported a $5,600,000 provision for credit losses during the Q1 of 2020 as the economic outlook worsened due to the pandemic.
Net charge offs for the Q1 of 2021 were $400,000 or 2 basis points annualized as compared to $1,600,000 or 9 basis points annualized of net charge offs recorded during the Q1 of 2020. For comparative purposes, the company recorded a $3,100,000 net benefit in provision for credit losses during the linked Q4 of 2020. The company recorded $93,300,000 in total operating expenses in the Q1 of 2021 as compared to $93,700,000 in the Q1 of 2020. The $400,000 or 0.4 percent decrease in operating expenses was attributable to a $600,000 or 1.1 percent decrease in salaries and employee benefits, a $1,700,000 or 16.4 percent decrease in other expenses, a $300,000 or 8.6 percent decrease in the amortization of intangible assets, a $300,000 decrease in acquisition related expenses, partially offset by a $2,000,000 19 percent increase in data processing and communication expenses and $600,000 or 5.2 percent increase in occupancy expenses. The decrease in salaries and benefits expense was driven by a decrease in retirement related severance and medical benefit costs offset in part by increases in merit and incentive related employee wages and payroll taxes.
Other expenses were down due to the general decrease in the level of business activities as a result of the COVID-nineteen pandemic. The increase in data processing and communication expenses was due to the Q2 2020 Stuven acquisition and company's implementation of new customer facing digital technology and back office systems during 2020. The increase in occupancy costs was driven by the Stoopend acquisition. Comparatively, the company reported $95,000,000 of total operating expenses in the linked Q4 of 2020. The company closed the Q1 of 2021 with total assets of $14,620,000,000 This was up $689,100,000 or 4.9 percent from the end of the linked Q4, and up $2,810,000,000 or 23 point 8 percent from a year earlier.
Similarly, average interest earning assets for the Q1 of 2021 of $12,690,000,000 were up $377,600,000 or 3.1 percent from the linked Q4 of 2020 and up $2,650,000,000 or 26.4 percent from 1 year prior. The very large increase in total assets and average interest earning assets over the prior 12 months was driven by the Q2 2020 acquisition of Scoop and Trust and large inflows of government stimulus and related deposit funding and PPP originations. As of March 31, 2021, the company's business lending portfolio included 874 First Draw PPP loans with a total balance of $219,400,000 and 18 19 second draw PPP loans with a total balance of $191,500,000 This compares to 3,417 1st draw PPP loans with a total balance of $470,700,000 at the end of the Q4 of 2020. The company expects to recognize through interest income the majority of which remaining for 1st draw net deferred PPP fees totaling $3,400,000 during the Q2 of 2021 and the majority of its 2nd draw net deferred PPPs totaling $8,300,000 in the 3rd and 4th quarters of 2021. Ending loans at March 31, 2021 were $7,370,000,000 47,600,000 or 0.6 dollars or 0.6 percent lower than the linked 4th quarter ending loans of $7,420,000,000 but up $502,200,000 or 7.3 percent from 1 year prior.
The growth in ending loans year over year was driven by the acquisition of 339 point $7,000,000 of student loans in the Q2 of 2020 and $399,200,000 net increase in PPP loans between the periods. The decrease in loan outstanding on a linked quarter basis was driven by a $48,300,000 decrease in business lending due to the decline in PPP loans. Exclusive of PPP loans, net of deferred fees, the company's ending loans increased $14,900,000 or 0.2 percent during the Q1. On a late quarter basis, the average book value of the investment securities decreased $118,300,000 or 3.1 percent due to the maturity of $666,100,000 of investment securities during the Q4, a significant portion of which occurred late in the quarter, offset in part by investment security purchases during the Q1 of 2021 totaling $546,800,000 Average cash equivalents increased $587,500,000 or 54.4 percent due to the continued growth of deposits. The average taxable yield on the investments during the Q1 of 2021 was 1.42%, including 2.02% taxable yield on the investment securities portfolio and 10 basis points of yield on cash equivalents.
At the end of the quarter, the company's cash equivalents balances totaled $2,000,000,000 During the Q1, the company redeemed $75,000,000 of floating rate junior subordinated debt and $2,300,000 of associated capital securities, which was initially issued by the company in 2006. Company's capital reserves remained strong in the Q4. The company's net tangible equity to net tangible assets ratio was 8.48% at March 31, 2021. This was down from 10.78 percent a year earlier and 9.92 percent at the end of 2020. The decrease in net tangible equity to net tangible assets ratio was driven by the stimulus aided asset growth, a decrease in accumulated other comprehensive income and increase in intangible assets.
Company's Tier 1 leverage ratio was 9.63 percent at March 31, 2021, which is nearly 2 times the well capitalized regulatory standard of 5%. Company has an abundance of liquidity, the combination of company's cash, cash equivalents, borrowing availability at Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available for sale investment securities portfolio, providing the company with over $5,670,000,000 of immediately available sources of liquidity. At March 31, 2021, the company's allowance for credit losses totaled $55,100,000 or 0.75 percent of total loans outstanding. This compares to $60,900,000 or 0.82 2 percent of loans outstanding at the end of the linked Q4 of 2020 $55,700,000 or 0.81 percent of loans outstanding at March 31, 2020. The decrease in the company's allowance for credit losses is reflective of an improving economic outlook, low levels of net charge offs and a decrease in length of loans.
Non performing loans decreased in the Q1 to $75,500,000 or 1.02 percent of loans outstanding, down from $76,900,000 from 1.04 percent of loans outstanding at the end of the Q4 of 2020, but up from $31,800,000 to 0.46 percent of loans at the end of the Q1 of 2020 due primarily to the reclassification of certain hotel loans under extended forbearance for accrual to non acromon statics between the periods. The specifically identified reserves held against the company's non performing loans totaled $3,600,000 at March 31, 2021. Loans 30 to 89 days delinquent totaled $19,700,000 or 0.27 percent of loans outstanding at March 31, 2021. This compares to loans 30 days to 89 days delinquent of $44,300,000 or 0.64 percent 1 year prior and $34,800,000 or 0.47 percent at the end of the linked 4th quarter. Management believes the decrease in the 30 to 89 delinquent loans a very low amount of net charge offs recorded in the Q1 was supported by the extraordinary federal and state government financial assistance provided to consumers throughout the pandemic.
From a credit risk and lending perspective, the company continues to closely monitor the activities of its COVID-nineteen impacted borrowers and develop loss mitigation strategies on a case by case basis, including but not limited to the extension of forbearance arrangements. As of March 31, 2021, the company had 47 borrowers in forbearance due to COVID-nineteen related financial hardship, representing 75.6 $1,000,000 in outstanding loan balances or 1 percent of total loans outstanding. This compares to 74 borrowers and $66,500,000 in loans outstanding in fullbringings at December 31, 2020. Operationally, we will continue to adapt to changing market conditions and remain focused on credit loss mitigation, new loan generation and deployment of excess liquidity. We also expect net interest margin pressures to persist to remain well below our pre pandemic levels.
Fortunately, the company's diversified non interest revenue streams, which represent approximately 38% of the company's total revenues, remain strong and are anticipated to mitigate the continued pressure on the net interest margin. In addition, the company's management team is actively implementing various earnings improvement initiatives, including revenue enhancements and cost cutting measures intended to favorably impact future earnings. Thank you. I will now turn it back to Gary to open the line for questions.
We will now begin the question and answer session. Our first question is from Alex Twerdahl with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning, Alex. Hey,
first off, Joe, you ran through a number of items on NII and impacting the NIM that hit in the Q1 and going to impact the Q2, including the PPP fees, securities purchases, the redemption of the sub debt, etcetera. Can you just slow down and go through those one more time and just kind of give us a sense for where, not necessarily the NIM, but where NII might be going into 2Q 2021?
Yes. It's a very good question, Alex. So in the Q1, we recorded we had significant payoff of PPP loans, the 1st draw of PPP loans, about $250,000,000 And so not only did we have amortization of those net deferred fees, we also had accelerated recognition of some of those fees. And that contributed about just under $6,000,000 in net interest income in the Q1. We do expect that the remaining some of the remaining PPP net deferred fees, which on the 1st draw PPP is about $3,400,000 We expect the majority of that to be recognized.
So just on a PPP deferred fee basis, we would expect that to negatively impact net interest income by about $3,000,000 On the other side is we've continued to lower deposit funding, it's trickled down, it was about 11 basis points last quarter, but it's continued to come down a bit, which may provide some modest offset to that reduction. We've also had a pretty good Q1 for given our seasonality around new loan origination was effectively flat exclusive of PPP and we have pretty good consumer portfolios pipelines right now, which will contribute I think favorably to net interest income next quarter. And also we continue to evaluate opportunities to deploy additional monies in the securities portfolio. I think the expectation is there is some inflation in the market and we hope that intermediate area of the curve and long end of the curve continues to move up a bit. And so we have some dry powder, more than some, dollars 2,000,000,000 of dry powder at the end of the quarter to deploy into the securities portfolio, which right now we're getting 10 basis points on that.
So they're effectively empty calories on the balance sheet, but we're looking for the right opportunities as the year plays out to invest some of that excess cash. So I think, Alex, it is difficult to give you the exact call relative to next quarter. But I think we have a couple of things that, particularly around cash equivalent opportunities, investment opportunities and a little bit of loan growth to support the second, third and fourth quarters.
Okay. And in terms of the securities purchases that you did in the Q1, when in the quarter were those and are those going to have some impact on net II in 2Q?
Yes. Alex, I'd have to pull up the actual security purchase dates, but we've made security purchases throughout the quarter. So some of that will assist the 2nd quarter results. So I think just for modeling purposes, assumption of mid quarter is I think a fair assumption as to when we redeployed, invested some of those securities.
Okay, great. And then it's been a little bit around a year or so since you guys closed the DuVin deal. Obviously, M and A
is a big part of
the CBU story. Could you maybe give us some commentary on sort of what you're seeing in the M and A environment out there? And then a lot of the deals we've seen this year have been kind of different in terms of MOEs and bigger deals. And I'm just curious if your thought processes around M and A have changed at all in terms of the types of deals that you guys would be considering in 2021?
No, Alex, it's Mark. I don't think our thinking has changed. I don't know that it's changed much really ever at least for do an MOE, never say that, but it's not going to do an MOE. I never say never, but it's highly unlikely we're going to do an MOE. It's highly unlikely that we're going to do a larger scale transaction that to us just creates a lot more risk.
It is inconsistent kind of with our historical model of smaller deals that are more additive as opposed to bigger deals, which tend to be less additive, so at least in terms of shareholder value. So I think we'll continue along the pathway of the 1,000,000,000 give or take size transactions, generally in market contiguous markets, and those kind of franchises that are a good fit for us qualitatively and economically in terms of sustainable earnings and shareholder value. So I don't think anything has changed. The market seems to have been busy lately with larger deals, larger institutions, more MOEs. I think from what my take is on it, a lot of the banks in our, let's call it target kind of profile are still trading at lower multiples because of their market cap and their liquidity.
And I think that's where we have fairly significant opportunity. And so I think right now, those a lot of those franchises are not getting the market recognition relative to larger cap companies. And so I think there's going to be a fair bit of opportunity for us in the space that we're interested in and we continue to be active in and have conversations and dialogues. So as I told our team, I suspect we will have the opportunity to do something constructive this year.
Okay. And I think last time we spoke, maybe it was still a little bit too early to really be confident in due diligence around kind of the impact of the pandemic on balance sheet. So you're now at the point where you feel like you've seen enough and seen how a lot of these economies have been impacted by the stimulus and whatnot to actually get comfortable through the due diligence process?
Yes. I think what I said, Alex, was I would not do a bigger deal in the middle of the pandemic or at least last year at some point, but we'd still do a smaller transaction. We felt we had better visibility into the risk profile of the credit portfolio. So nothing's really changed there. I think a lot of the opportunities that we have over time are institutions that we know and we've followed for a long time and we pay attention to.
And so have a pretty good feel already for their portfolio and their discipline around credit and other operational aspects of their business. So I'm not at all concerned about the impact, the lingering, let's call it, of the pandemic. So that will not it has not affected our thinking in any way on M and A opportunities.
Great. Thanks for taking my questions.
Thanks, Alex.
The next question is from Russell Gunther with D. A. Davidson. Please go ahead.
Hey, good morning, guys.
Good morning, Russell. Good morning, Russell.
Hey, guys. So first question would be on the employee benefit services line, good year over year growth. Curious to get your thoughts on the organic revenue projection there. And then following up on the question about M and A, would a depository deal kind of preclude you from looking at acquisitions within your fee verticals and what those might be, whether it's in employee benefits or elsewhere?
Yes. No, we had good growth in the employee benefits year over year. I think it was 8%, something like that, 6%, I don't know exactly. But it was pretty strong growth and the expenses were flat, actually it might have been down a little bit. So anytime you can grow revenues and reduce expenses, that has an exponential impact on margin.
So very good quarter for the employee benefits business. They continue to perform well. We expect they will continue to perform well. Interestingly enough, there are a lot of M and A opportunities in that space right now. There has been for the last 12 to 18 months.
It's been a challenge to compete against private equity. We've had different valuation models than us in some cases in terms of valuations. But we have some things percolating right now as well. And I think that's just will be ongoing in that business. It's a very strong business.
I think we clearly have critical mass in that business. The run rate on revenues this year is going to be $110,000,000 or so at really good margin. So I think that business will continue to perform really well. As the question around whether acquisition opportunities in that space preclude us from kind of depository opportunities or vice versa, the answer is no, clearly not. We I think historically have kind of done multiple transactions across disciplines historically and we continue to do that.
It is a different, for the most part, subset of folks that work other than me and Joe and a handful of other folks and kind of HR, IT and some things. But it's not it's a different level of effort with a generally different kind of teams because obviously the teams in those business lines are actively engaged in those efforts and kind of lead those efforts in terms of identifying and supporting opportunities there. So we clearly continue to work hard in both the depository side and the non banking side of our business. We have some also some things opportunities in the insurance business as well that we're in the midst of pursuing. We expect to close on a small transaction.
In fact, I think next month and have some others that we're having discussions with as well. Wealth Management is a little bit different. We've never done a lot in terms of buying whole businesses and wealth management that the pricing is really extreme and sometimes I'll call it the personalities are more difficult and challenging. I mean the other to me it's a risk, but in wealth management, you don't really own the assets. You don't own the relationship.
What you're buying is customer relationships, you don't own those relationships. In banking, the bank owns the relationship for the most part in insurance. The business owns the relationship. It's a little bit different wealth management, so we've never done a lot there. But we have lots of books of businesses, actually a lot of them.
They've been very constructive. See if I have 1 or 2 man shop that's more akin to kind of a significant signing bonus for bringing 1 or 2 or 3 folks on. A lot of times they're even structured as M and A. So those have worked out really well for us and I think our bar is a little higher on doing something in terms of the wealth management businesses. But clearly on the benefits businesses and the insurance, We've been active and I expect we will in fact we're active right now.
So we'll continue to do that. Those businesses really have in May. They had a good year last year and then you look at the Q1 and that's it. It's impressive. So operating at a very high level right now.
I really appreciate the detailed thoughts there, Mark. And then my last question, guys, is on the expense side of things. So in your prepared remarks, you mentioned expense initiatives and results this quarter showed positive momentum, were below consensus. So I would just be curious to get a sense for your thoughts on the expense run rate going forward and any detail on the type of initiatives you were referring to in your prepared remarks? Thank you.
Good question, Russell. We saw back last year, 2nd and third quarter that we were running into some margin headwinds and actually organized a management group to look hard at some of the expense line items and some opportunities on the revenue side. We started to actually implement some of those initiatives in the Q4, 3rd and 4th quarters and now into the Q1, which we're working with our vendors on certain contract negotiations. We've done a handful of branch consolidations to reduce expenses on that side. We've looked at some other revenue line items in some of our in some of the commercial space to try to generate some additional revenues there.
So that's kind of the initiatives we put in place. On a going forward basis, we would expect to kind of contain, say, the year over year growth rate around expenses to something in the very low single digits from an annual quarter comparative basis. Whereas I'll say in normal times, we might the line item for OpEx might grow 3% or 4% or 5% in a year. We're trying to contain it below that really to make up for some of the challenges around the margin.
Just to
add a bit to that, Joe mentioned some branch consolidations. We've done about 20 in the past year. I think we're going to do some more, not a lot more, but and so there's been some expense benefit from that. We have relied solely on attrition, which has worked out well to reduce the workforce there. So we have not despite the fact we consolidated about 20 branches and we'll do a handful more.
We haven't taken out directly any FTEs other than through attrition. I think this year we're forecasting based on branch traffic. If you look at before the pandemic, our run rate on branch transactions, we closed the branches, then they opened back up. And we looked at traffic again and it was down about 17% pre COVID. It's still down about 17% pre COVID.
And so if we look at our plan around consolidation, it ends up being around that 17% number reduction in branch FTEs, which is a triple digit number of FTEs. So there's some reasonable amount of expense and cost reductions here. And if you look at the branches we consolidated, we go on S and L and look at our branch map. I mean, there's density there. We have density in certain markets where I would characterize us as overdense.
So, there's we have a fair bit of opportunity, I think, to consolidate in a prudent way. This isn't about expense reduction. This is about essentially, and I'll comment it more broadly. Branch traffic for us for 10 years prior to COVID, it declined almost exactly 4% a year. And then COVID came and people found other channels, digital channels, and it gapped down another 17%.
So what we are doing is, I would say broadly, we are divesting in analog and investing in digital. And so ensuring that we have an appropriate branch structure consistent with the trends in the market, the trends of our customers, how they're using our channels, whether it be analog channels like branches and drive thrus or whether it be digital channels like mobile and ATMs and remote deposit capture and online banking and all of those kinds of things, self-service functionality. So we are just trying to mirror we are trying to pair up the continued decline in analog channels with our investment in digital channels. So we've done a fair bit around the branches. We'll again probably do a little bit more, but we're trying to do it prudently.
This isn't an expense graph trying to just close branches for the sake of closing. I think one of the things when you have kind of the history of acquisitions, both whole bank and branch transactions that we've had for the last 15 years, it's not that difficult to become overdense in markets. So we're just trying to address the overdensity we have in some of our markets as a result of the history of M and A activity.
Thank you both for taking my questions.
Thank you, Russell. The next question is from Matthew Breese with Stephens Inc. Please go ahead.
Good morning. Just a question on the cash position, how you're thinking about it. So of the $2,200,000,000 how much of that are you defining as required versus maybe we need to hold on to because there's going to be some volatility in PPP and deposit balances? And the follow-up to that is how much should we expect to be kind of put to work over the next few quarters, either securities and loans?
Yes, it's a very good question, Matt. In fact, prior to the call, actually, we talked to our Chief Investment Officer about deployment and what opportunities might be out there over the coming year. And in essence, we have the $2,000,000,000 our open lot of We're, I guess, believing that there is some inflation in the market, which might drive up the long end of the curve. Potentially, if the Fed ever talks about tapering again, maybe toward the second half of the year, we could see an increase there. So we're looking at that $2,000,000,000 effectively as dry powder, looking to invest maybe half of that over the coming three quarters or so.
Obviously, we're watching the market daily and just looking for those opportunities.
I would say just to add beyond that, this isn't just about reinvestment of $2,000,000,000 $2,200,000,000 I think of liquidity, but it's also about the out year impact on margin and net interest income. And we are extremely, like most banks I suspect, highly asset sensitive. So it does not work against our ALCO models. In fact, it helps balance our ALCO models by investing some of that liquidity and reducing giving away, in fact trading away some of that upside risk in rising rates to trade off against lower margin and them in the declining rate environment. So investing, I think some of it clearly not all of it, it is enormously.
I mean, if we don't have the opportunity, we may be on the call in 2 years saying we still have $2,200,000,000 So I don't think we're necessarily going to be in a rush or undisciplined about how we invest. And I think Joe said over the next couple of quarters, which I think that would be fabulous if that happened. I question whether it will or it won't. But I think half of it is probably an area where it would be helpful to kind of current net interest income in NIM, but would help us from an ALCO standpoint in terms of balancing the risk we have in falling rates and the benefit to rising rates. So a lot of this is not the discussions that we have is not driven by how do we use the $2,000,000,000 to create more earnings.
It's not about that. We'll be disciplined. We have a lot of other earnings levers that we can't pull and are pulling and have pulled. And so we'll be disciplined about it. But if we get the opportunity, we will pull the trigger, but it certainly wouldn't be on the entire $2,000,000,000 because I mean, there's clearly still some risk that there that over time, I think the runoff of the excess liquidity is going to take longer than the build up, right?
I mean, you look at the balance sheet a year ago, 2 years ago in particular, and there was liquidity didn't look anything like this. I think it will take a little bit longer for it to run off than it did for it to accumulate because the stimulus and PPP and those kinds of things. And people reducing kind of their living expenses, business and reducing operating expenses. So it's going to take a while. And so that's, I guess, from my perspective, just wanted to make the point that our interest rate sensitivity, when I think about liquidity and liquidity deployment, I don't think about earnings, I think about interest rate risk into the future and how to manage that.
Okay. And maybe tying this discussion back into Alex's earlier question in regards to net interest income. If I strip away PPP, I'm looking at core NII this quarter in around $86,000,000 As you deploy or think about deploying half of the liquidity, do you think that number, that $86,000,000 represents a floor for where we are in this current economic and interest rate environment?
Good question, Matt. I think it's pretty close to the floor. We do deploy some of that excess liquidity. That certainly will help. And I think for Alex's question, we had a late in Q4, we had a significant maturity of investment securities and we redeployed some of that during the Q1 and it wasn't not all of it was deployed right at the beginning of the quarter.
So we do have a little momentum from the deployment of that $400 plus 1,000,000 of investment securities. And I know we're looking at the PPP as non core and I do understand that. I mean, the other side of that it was earned and that was the card we were dealt and we did, I think, a pretty good job of playing that card and originating PPP. And we will have some recognition, I think, of the deferred fees throughout this year. And if we continue to deploy some of that securities and have some loan growth, we potentially start to restore some of that net interest income outcome.
So, yes, we're obviously hopeful that that 86% is the floor and think that we do have some potential momentum filling in behind the PPP recognition after we conclude 2021.
Okay.
Last one is just in regards to the loan pipelines. You talked about the consumer pipeline. It sounded a bit more optimistic. What are the components? So is it auto heavy or residential heavy?
And then you mentioned that you have some work to do on the commercial side. So just curious about the components and what does the pipeline tell you about your local economy and path towards recovery?
Hey, Matt, it's Joe. I'll take that. So the you mentioned residential. So the residential pipeline is about 30%, growing about 30% quarter over quarter. And it's across most of our markets.
And the expectation is that it will continue to be strong as we make our way through the Q2 and into the Q3. So good activity. And as you may know, we rolled out beginning of the year, tail end of last year, beginning of this year, a digital mortgage platform. So we're in the digital age and we're enjoying some upside potential from that as well. So to give you a sense, the mortgage pipeline sits at about $170,000,000 I'm not sure the last time I saw that number.
So that's positive. The other positive on the retail side is the direct portfolio, the car business. That's been growing this year as a result of a change in focus on our part. We spent a little bit more time focusing in on volume and a little less time on return, recognizing that we need to make some more loans around here. So the indirect portfolio is, although it doesn't have a pipeline, has been growing terrifically and it's up almost 3% year to date.
So we like what we've seen. Again, it's across all of the footprints that we're in. On the commercial side, it's a little different story. We're about half of where we were this time last year. Keep in mind, we took an approach around PPP where we were doing it all internally.
So, we took people off the street, if you will, the commercial bankers and retail bankers to handle all of the PPP activity. And that's been going on now for 14, 15 months. So I'm not surprised that the portfolio or the pipeline is where it is. And also recognizing just the pandemic and the impact we've had on just general activity overall, it's been off. So the commercial pipeline, about half of what it was this time last year, residential pipeline up nice residential mortgage pipeline up nicely, and the application volume in the indirect portfolio also is up nicely.
And we expect those to continue. And as Mark said, we're
in the process of rebuilding the commercial portfolio. That will take some time. We're seeing a little bit of light at the end of the tunnel. All geographies have some activity. So we're cautiously optimistic that we'll get the commercial pipeline heading in the right direction.
Great. I appreciate it. That's all I had. Thank you.
Sure. Thanks, Matt.
Showing no further questions. This concludes our question and answer session. I would like to turn the conference back over to Mr. Triniski for any closing remarks.
Nothing other than we will talk to you at the end of the next quarter. Thank you all for joining again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.